1 Introduction
There has been ongoing evaluation of New Zealand’s growth performance following the recent economic reforms. That performance has improved since the mid 1990s.[1] Growth in multi-factor productivity (MFP) is now more comparable with that of Australia. MFP growth has, however, been uneven across nine broad industry sectors through the 1990s – being better in primary industries, retail and wholesale trade, and personal and community services, but poorer in utilities, manufacturing, mining, and transport and communications. In addition, our capital to labour ratio is significantly lower than Australia’s. The IMF (2002) has also identified differences in the rate of capital accumulation between Australia and New Zealand as being important in the divergence in growth rates between the two countries.
This paper explores some of the micro-foundations that help to explain these aggregate outcomes. It investigates how skills and knowledge generate productivity improvements within firms through the pursuit of efficiency, innovation and market opportunities. The analysis is organised around the firm, as it constitutes the basic production unit in the economy, and provides the link between capital, product and labour markets. The paper draws together the evidence on the role of skills and knowledge around three main themes: the different categories of skills involved, the mechanisms by which skills contribute to productivity improvements, and the acquisition of skills. The review indicates that substantial gaps exist in our understanding of how skills contribute to firm performance, which skills are important, and how important skills are relative to other firm inputs.
This role of skills within the firm is part of the wider linkages between human capital and economic growth. The skills and knowledge that influence firm productivity include the skills embodied in people through innate abilities, learned skills, accumulated formal and tacit knowledge. A skilled workforce can be obtained by recruiting suitably skilled workers, and/or by training employees on the job. Also included is the knowledge embedded in organisational and incentive arrangements. Less attention is given here to the acquisition of disembodied knowledge through a firm’s purchase of technologies and equipment.
The scope of the paper has been limited in three broad ways. First, the primary focus is on economic growth. Governments have concerns for fairness or equity, and the wellbeing of society has other dimensions, and so a wider range of goals will need to be taken into account in policy formulation processes.[2] Second, attention is restricted in the paper to the contribution of workplace skills to firm productivity. Other factors are excluded such as business R&D, the process for commercialising innovations from publicly funded R&D, and the cost of capital and New Zealand’s financial institutions. Third, several aspects of the connection between workforce skills and aggregate growth are not covered in any depth. Given the paucity of New Zealand evidence, there is often a reliance on overseas findings. This requires that differences in firm size and economic geography be taken into account. It has also been assumed that increases in firm productivity are good for aggregate economic growth. A range of second round impacts, such as the effects on employment and on technology diffusion, would need to be included to formalise that connection.
The paper is structured in the following way. A framework for organising the review of literature is provided in Section 2. The review of evidence begins in Section 3 by considering the main attributes of the three broad categories of skills, and how each contributes to improvements in firm productivity. Section 4 sets out evidence on the linkages between skill levels and technology adoption, and their contribution to productivity. The evidence on knowledge spillovers that are occurring at the worker, firm and industry levels is considered in Section 5. In terms of skill acquisition, Section 6 focuses on work-based training, the scope for market failure in the demand for and supply of training, and whether government intervention might improve this outcome. Section 7 draws out the key themes in the paper, together with opportunities for further work.
